SURVIVORSHIPS, JOINT TENANCIES, ALTERNATE BENEFICIARIES: THE INS AND OUTS

R. J. (RON) DOLD, Houston WESTCOR LAND INSURANCE COMPANY

29TH ANNUAL ROBERT C. SNEED TEXAS LAND TITLE INSTITUTE December 5 - 6, 2019 San Antonio

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“2019 Texas Land Title Institute” Survivorships, Joint Tenancies, Alternate Beneficiaries Biography for Ronald J. Dold

Ron joined the Texas underwriting staff of Westcor Land Title Company in 2018 after 5 years with the Office of General Counsel of The Texas A&M University System, and has over 40 years’ experience in real related practice. Ron holds a Bachelor’s Degree in Industrial Engineering from General Motors Institute in Flint, Michigan, a Master’s Degree in Industrial Engineering from Texas A&M University in College Station, Texas and completed his degree at South Texas College of Law in Houston, Texas.

Ron worked 17 years for two major oil companies in Houston, and prior to his time at A&M, served for 15 years as Senior Underwriting Counsel in a National Commercial Office for a major company in Houston, underwriting high liability transactions and working closely with outside counsel for all parties.

Since 2006, Ron has been an active speaker on the CLE circuit on a variety of and title insurance topics. Ron and his wife Brenda reside in Bryan, Texas.

“2019 Texas Land Title Institute” Survivorships, Joint Tenancies, Alternate Beneficiaries

SURVIVORSHIPS, JOINT TENANCIES, ALTERNATE BENEFICIARIES: THE INS AND OUTS

Since the tax man and Courts were invented, and records were created to transfers of , individuals have worked diligently to find a way to pass title owned at death to family members or other heirs-at-law without subjecting property to potential estate taxes or having to involve Probate. One vehicle commonly used is establishment of a Living Trust with designated beneficiaries, which is beyond the scope of this discussion. Another method devised was the use of joint ownerships, together with a system of survivorship rights. It is this system which is the topic of this discussion. Our discussion here will focus on the various types of joint , and the methods for creating effective survivorship rights to designated individuals without involving probate.

Types of Joint Ownership

There are several types of joint ownership recognized under . The generic term used for joint ownership is “tenancy in common.” By definition Tenancy in Common is a specific type of concurrent, or simultaneous, ownership of by two or more parties. Generally, co-ownership can take three forms: 1) tenants in common; 2) joint tenants; and 3) (in Texas) . In non- community property states this last type is referred to as tenants by the entirety. These forms of concurrent ownership give individuals a choice in the way that co-ownership of property will be carried out and each type of tenancy is distinguishable from the others by the rights of the co-owners. These 3 types of joint ownership can be created by deed, will, or even .

One common trait among the various types of co-ownership is that each owner has an "undivided interest" in the property and all have an equal right to use 100% of the property, even if the percentage of interests are not equal or the living spaces are different sizes. Any such use must be done in such a way so as to not precluded use by any other co-owner.

Tenants in Common

The most common co-ownership type in Texas (other than community property rights discussed below) is tenants in common. Usually, the term “tenant” in real estate terms is understood to describe a person who rents or a piece of property. In the context of concurrent estates or co-ownership however, a tenant is considered to be a co-owner of real property. Thus tenants in common is a form of concurrent ownership of real property in which two or more persons possess the property simultaneously. All tenants in common hold an individual, undivided ownership interest in the property. This means that each party has the right to alienate, or transfer the ownership of their individual ownership interest. This can be done by deed, will, or other conveyance. Furthermore, tenants in common may acquire their interests from different instruments and at different times. Another distinct characteristic of tenants in common is that the co-owners may hold unequal interests in the property. A tenancy in common can be created by deed, a will, or by intestate succession. “2019 Texas Land Title Institute” Survivorships, Joint Tenancies, Alternate Beneficiaries

Community Property Rights

Texas is of course a community property state, meaning that all property acquired during is owned in equal shares by the two spouses. The exceptions to this rule is any property: 1) owned before the marriage; 2) inherited; or 3) received by . There is a (rebuttable) Community Property Presumption which holds ALL property owned by a married couple is presumed to be community property on or death unless it can be conclusively proven to be non-community or separate property. Generally, the character of property as either community or separate is based on marital status at the time the property was acquired, which is the purpose of the marital history affidavit (to include dates of marriage and divorce) that every title office obtains in every transaction where ownership is held by individuals.

I want to mention in passing and as a matter of legal curiosity, in non-community property states there is also a vehicle to address the rights of a spouse in ownership of property acquired during marriage called a tenancy by the entirety. A tenancy by the entirety is type of in real property held by a Husband and Wife whereby each owns the undivided whole of the property, but it is similar to a joint tenancy because it is also coupled with a right of survivorship, so that upon the death of one spouse, the surviving spouse is entitled to the interest of the deceased spouse. Contrast this to a community property interest which is similar to a tenancy in common and upon death of one spouse the interest of the deceased spouse does not transfer automatically to the surviving spouse but rather is passed as an under a will or the of intestate succession.

Joint Tenancy (With Right of Survivorship)

In estate law, a joint tenancy is a special form of ownership by two or more persons of the same property. The individuals, called joint tenants, share equal ownership of the property and have the equal, undivided right to keep or dispose of the property. The term “joint tenancy” by definition creates a right of survivorship, that is, when any one of the joint tenants dies, that interest is transferred and divided among the remaining survivors in equal shares. Four main features mark this type of ownership: (1) the joint tenants own an undivided interest in the property as a whole; each share is equal, and no one joint tenant can ever have a larger share; (2) the estates of the joint tenants are vested (meaning fixed and unalterable by any condition) for exactly the same period of time, in this case, the tenants' lifetime. (3) the joint tenants hold their property under the same title, that is, joint tenants must obtain their interests at the same time and in the same document; and (4) the joint tenants all enjoy the same rights until one of them dies. When only one joint tenant is left alive, he or she receives the entire estate. A joint tenant may alienate his property, but if that occurs, the tenancy is changed to a tenancy in common and no tenant has a right of survivorship.

Survivorship

As stated in the beginning or our discussion the objective of survivorship rights advocates is to find an effective way to transfer title owned at death to family members or other heirs-at-law without subjecting “2019 Texas Land Title Institute” Survivorships, Joint Tenancies, Alternate Beneficiaries the property to potential estate taxes or having to involve Probate. The focus of our discussion will be joint tenancies with right of survivorship, but we will also briefly discuss the use of an Enhanced Deed (aka “Lady Bird” ) and a fairly recent method advocated by the Texas Legislature, the Transfer on Death Deed or “TODD .”

Enhanced Life Estate Deeds aka “Lady Bird Deed” . A Lady Bird Deed was designed to help pass property from a deceased individual to a survivor outside of probate. The Lady Bird Deed allows the grantor the right to keep the property, sell it, it or mortgage it and keep all proceeds of the property. This enhanced life state arrangement can do a number of things, including:

• Allows for the transfer of the remaining interest on a piece of real estate; • Allows the current owner to reside in the property; • Allows the current owner to terminate the remaining interest on a property and transfer it to someone else; • Allows individuals to bypass gift tax

A Lady Bird Deed may be signed by an agent acting as a Power of Attorney.

Transfer on Death Deeds aka “TODD” . In the 2017 Legislative session the Texas Legislature added Chapter 114 to the Estates Code to provide the Transfer on Death Deed allowing for the transfer of a property interest upon the death of the Grantor. Much like the Lady Bird Deed, the Transfer on Death Deed is designed to avoid real estate recovery. Key requirements for creating a valid TODD are”

• Capacity for creating a TODD is the same as the capacity to make a ; • Contain the essential elements and formalities of a recordable deed; • Include a statement that the transfer of the interest is to occur at the Grantor’s death; • Must be recorded in the County where the land is located prior to the death of the Grantor; • No delivery/acceptance is required by the beneficiary; and • No consideration is required.

A TODD is revocable by either the Grantor conveying the property to a 3 rd party or by executing a subsequent or 2 nd TODD. TODD’s are relatively new, and as yet untested in any published court opinions. A TODD has some limitations the Lady Bird Deed does not.

• It may not be executed by an agent under a power of attorney; • The beneficiary must survive the grantor by 120 hours (not the case with a Lady Bird Deed); • A Transfer on Death Deed is subject to claims against the estate for two years after the death of the grantor. (Estates Code Section 114.106(e)) • A TODD conveys only a while a Lady Bird Deed actually conveys title subject to the enhanced life estate retained by the Grantor.

“2019 Texas Land Title Institute” Survivorships, Joint Tenancies, Alternate Beneficiaries In the recently completed 2019 85 th Legislative session the Texas Legislature passed HB 2782 (effective September 1 st ) which, in part, made some significant revisions to Chapter 114. Among the key provisions the bill revoked the previous statutory form for a valid TODD, and also provided that a TODD may now provide for an alternate beneficiary in the event the primary beneficiary fails to meet the 120-hour survival test.

Creating Joint Tenancies with a Right of Survivorship (“JTROS”)

After all of our academic discussion on JTROS above, Texas has not favored JTROS arrangements, except in the case of bank accounts and financial depositary and/or brokerage accounts, and certainly not in the real estate context. Sec. 101.002 of the Estates Code provides the general rule to be followed in Texas: “If two or more persons hold an interest in property jointly and one joint owner dies before , the interest of the decedent in the joint estate: (1) does not survive to the remaining joint owner or owners; and (2) passes by will or from the decedent as if the decedent's interest had been severed.” In the 2009 81 st Legislative Session, the Texas Legislature codified Section 46 of the former Probate Code into Chapter 111 of the Estates Code which allows “Notwithstanding Section 101.002, two or more persons who hold an interest in property jointly may agree in writing that the interest of a joint owner who dies survives to the surviving joint owner or owners.” (Texas Estates Code Section 111.001(a)) Section 111.001(b) continues to provide “an agreement described by Subsection (a) may not be inferred (my emphasis) from the mere fact that property is held in joint ownership.” This Chapter specifically does not apply to an agreement between spouses regarding the spouses' community property which is covered by Chapter 112 (Texas Estates Code Section 111.002).

This raises another question. Can you create a JTROS with community property and if so, what are the formalities required? Sec. 112.051 of the Estates Code provides: “At any time, spouses may agree between themselves that all or part of their community property, then existing or to be acquired, becomes the property of the surviving spouse on the death of a spouse.”

Sec. 112.052 goes on to require an acceptable form of agreement must: (a) be in writing and signed by both spouses. (b) is sufficient to create a right of survivorship in the community property described in the agreement if the agreement includes any of the following phrases: (1) "with right of survivorship"; (2) "will become the property of the survivor"; (3) "will vest in and belong to the surviving spouse"; or (4) "shall pass to the surviving spouse." (c) (omitted) (d) A survivorship agreement may not be inferred from the mere fact that an account is a joint account or that an account is designated as JT TEN, Joint Tenancy, or joint, or with other similar language.

“2019 Texas Land Title Institute” Survivorships, Joint Tenancies, Alternate Beneficiaries What has been an underwriting dilemma for years is what constitutes an “agreement in writing” between co-owners or spouses sufficient to create a valid JTROS. One would think under Chapters 111 & 112 a mere statement in the granting clause in a deed stating the interest being created is a JTROS is not sufficient because that relationship cannot be inferred under Chapter 101, although Texas attorneys have been utilizing this method for years. Lately savvy drafters have been having the Grantees (being all the joint tenants) also sign the deed to evidence this is a “writing” worthy of satisfying the requirements of Chapters 111 & 112. But what do the Courts have to say on the topic? We will examine these two issues separately, starting with Chapter 112 applying to community property.

Creating a JTROS with Community Property. There are not a lot of cases on point but the two most interesting ones I found are Beatty v Holmes , 233 SW3d 475, Tex Civ App-Houston (14 th ) (2007) and Haas v Voight , 940 SW2d 198, Tex Civ App-San Antonio (1996). There is a great summary of the history on the topic in Haas (at 200) so we’ll start there.

Prior to 1925 there was a presumption that community property in Texas was held between spouses as JTROS. In 1925 Art 2580 passed and abolished this presumption of a JTROS as a matter of law, but still allowed a JTROS could be created in certain situations. See Chandler v Kountze (discussed below). Later the Courts clarified the process to create a valid JTROS on community property now required a two-step process, first a from community to separate property and then creation of the JTROS with a written agreement. (Hilley v Hilley 342 SW2d 565 (Tex 1961) . Shortly after Hilley the Legislature amended Section 46 of the Probate Code (now Section 112.051 of the Estates Code) to allow spouses to create a JTROS for community property with a written agreement signed by both spouses, and the Texas Supreme Court promptly declared Section 46 unconstitutional in Williams v McKnight 402 SW2d 505 (Tex 1966) reiterating the holding in Hilley that community property must first be partitioned to separate property of the spouses before creation of a valid JTROS. In 1987 the Texas Constitution was amended and in response the 1989 Legislature amended Section 46 of the Probate Code (now Section 112.051 of the Estates Code). As a result of all this, there are two ways to create JTROS with community property, the partition route or by written agreement.

In Haas Bert & Emma Haas were married and had three children, namely Joyce, Shirley & Herman. Bert died in 1994 leaving everything to Emma, who was declared NCM soon after Bert died. Emma died July 1994 but at some point (it is not clear when from the facts discussed) Herman was declared her legal guardian. Emma had a will leaving everything to the three children in equal shares. The children starting fighting over the assets but reached settlement on everything except as to three deposit accounts with Bank of America and 1 account with Nations Bank. Bert & Emma had created the BOA accounts as JTROS, while Bert and his son Herman created the Nations account, again as JTROS. All 4 accounts were funded with community funds and parties conceded there was no partition of the community into separate property first. Right before Bert died, Bert and Herman sign new signature cards at BOA removing Emma and purporting to create a JTROS account between Bert and Herman. The trial court found the accounts belonged to the Emma’s estate. The Court of Appeals affirmed, reasoning an attempt to create a JTROS between Bert and Herman was ineffective on community property because there was no prior partition (as to the Nations Bank account) nor a revocation of the prior JTROS designation as to the BOA accounts “2019 Texas Land Title Institute” Survivorships, Joint Tenancies, Alternate Beneficiaries (which were effective) created by Bert & Emma. Therefore the attempt by Bert and Herman to create a JTROS where Herman was the beneficiary was ineffective as to the community property simply because Herman was not a spouse.

Beatty , out of the 14 th Appellate Court in Houston in 2007, is perhaps is the most definitive case on creation of a JTROS with community property. Thomas & Kathryn Holmes married in 1972. Kathryn died in July 1999 and Thomas in May 2000. Beatty, Kathryn’s son from a previous marriage was appointed Independent Executor of her estate. Holmes, Thomas’ son from a previous marriage was appointed Independent Executor of his estate. Together Thomas and Kathryn had multiple brokerage accounts valued in the millions. Thomas and Kathryn contributed community funds to the accounts that were shown to be established as JTROS. Holmes claimed the brokerage accounts were JTROS and thus Kathryn’s ½ passed to Thomas when she died and thus was no part of Kathryn’s estate. Beatty obviously wanted Kathryn’s community interest to be included in Kathryn’s estate. The Probate Court, on summary judgement, ruled the accounts were a JTROS and had passed to Thomas when Kathryn died and no part of the brokerage accounts were part of Kathryn’s Estate. The Appellate Court reversed, holding the JTROS was not validly created, citing the Estates Code requirement to create a JTROS of community property requires certain formalities, including an agreement in writing signed by both spouses. The Court focused on the form Thomas and Kathryn signed when creating the account in determining whether it met the formalities of the Code. The Court noted in the form there were three options/opportunities for Thomas and Kathryn to complete the form and clearly indicate their intent to establish a JTROS, but they did not comply with any one of them. Thomas and Kathryn merely signed and dated a blank form, without strikeouts or filling in any blanks, and as a result the Court ruled the minimum requirements to establish a valid JTROS were not met and it was inappropriate to presume the spouses intent to create a JTROS with this community property. The Court held that Thomas’ estate did not own 100% of the account and 50% of the brokerage account should be included in Kathryn’s estate.

Creating a JTROS with Non-Community Property. The landmark case on the topic of JTROS in the State appears to be Chandler v Kountze , a 1939 case out of the Galveston Court of Appeals. ( Chandler v Kountze , 130 SW2d 327, Tex Civ App-Galveston (1939)). Most recently the Corpus Christi Appeals Court rendered the decision of Wagenschein v Ehlinger , 581 SW3d 581, Tex Civ App-Corpus Christi (2019) which may prove to be the most useful on the topic.

In researching the topic of JTROS in Westlaw the case that repeatedly appeared as a citation in the headnotes was Chandler . In a 1908 deed Charles and Luther Kountze acquired title to certain lands in Wharton County as JTROS. At that time of acquisition, there was a common-law presumption that all joint ownerships in Texas were a JTROS. In 1925 Luther died leaving a wife and two children. Subsequent to Luther’s death in November 1925, Charles conveyed the property to himself and Denman Kountze (presumably his son) as a JTROS. In 1929 Charles and Denman sold the property to W.E. Chandler in a deed retaining a vendor’s on the property to secure payment of five separate 1-year notes. Chandler paid the first note, renewed and extended the remaining four notes, and eventually defaulted in payment. In 1936 Charles filed a ‘blanket deed” (in effect a correction deed) to “take care of and cover mistakes, misdescriptions or insufficient descriptions” appearing in the 1929 deed to himself “2019 Texas Land Title Institute” Survivorships, Joint Tenancies, Alternate Beneficiaries and Denman. In 1925 Art 2580 (V.A.T.S) was enacted which abolished the common-law presumption of a JTROS and when Kountze sued to foreclose the vendor’s lien on the property, Chandler counter-claimed seeking to halt the on the basis the enactment of Article 2580 abolished the possibility of a JTROS and upon Luther’s death his interest in the property should have passed to his heirs at law and what Charles and Denman had only a vendor’s lien in ½ of the property. The trial court rendered judgement for Kountze and Chandler appealed. The Galveston Appeals Court affirmed and allowed foreclosure to proceed. Prior to 1925 at common-law when property was conveyed to multiple owners it was presumed to be as JTROS. In 1925 Article 2580 abolished the concept of JTROS as a matter of law but the Court ruled Article 2580 did not preclude establishment of JTROS by written agreements. Recall this case was decided in 1939, only 14 years after enactment of Article 2580, so this was a question of first impression before the Texas courts. Despite not having Texas precedent to fall back on, the Galveston Court did find and cite cases from 9 other states on the topic, all with a consistent holding. Interpreting Chandler a step further, the holding clearly allows for establishment of a JTROS by written agreement, and it appears the Court is suggesting that creating a JTROS in a deed satisfies the requirement of a “written agreement.”

In July 2019 the Corpus Christi Appeals Court now appears to have brought some clarity (maybe?) to the topic in the Wagenschein. Oswalt & Marie Wagenschein owned 240+ acres in DeWitt County and had seven children: Viola, Erna, Victor, Clara, Paul, Frieda, and Norman (the “Original Siblings”). After both parents died the Original Siblings inherited the property. In 1989 the Original Siblings deeded to Harvey and Jane Mueller and reserved a ½ mineral interest for “the Grantors and the survivor of the Grantors.” The reservation concluded it would “continue until the death of the last survivor of the seven individuals referred to as Grantor in this deed.” In 2006 Mueller executed an oil & gas lease on the property (no argument there) and in 2009 the first of the Original Siblings died (Clara) leaving two children Dwight & Carol as her heirs. The first oil well on the property was completed in 2010 and the operator paid each of the 6 remaining Original Siblings a 1/6 th of ½ interest. In 2011 Norman died leaving two children, Vicki and Jane as his heirs. Paul died in 2012 but before he died, conveyed his interest to his children Kevin and Kim, who in turn conveyed to a Family Trust. Frieda died in 2014 leaving her son Kenneth as her sole heir. As each of the Original Siblings died, the operator distributed to the then surviving Original Siblings pursuant to a written division order an increased percentage based on the number of the Original Siblings still alive, until finally after Frieda’s death, the operator paid 1/3rd each to Viola, Erna and Victor as the surviving Original Siblings. In 2015 Kevin & Kim as Co-Trustees of the Family Trust, along with the other heirs of the deceased siblings sued the surviving Original Siblings claiming the reservation in the deed did not create a valid JTROS but rather created a tenancy in common, thus the interests of the deceased Original Siblings would have passed through their respective estates. On summary judgement the trial court held for the 3 surviving Original Siblings, ruling the reservation did indeed create a valid JTROS and the mineral reservation would revert to the Mueller’s after the last of the 3 surviving Original Siblings had died. The Corpus Christi Court affirmed, based mainly on an interpretation of the language in the reservation. The Court held the reservation, and the deed as a whole, was not ambiguous so it was for the Court to decide its interpretation as a matter of law, which they did by invoking the “4-corners rule.” In the analysis the Court noted that as each of the first four Original Siblings passed, the surviving Original Siblings enjoyed an increased benefit until there were only 3 “2019 Texas Land Title Institute” Survivorships, Joint Tenancies, Alternate Beneficiaries siblings remaining. The Court reasoned that all appellants were heirs of or gained title under one of the deceased siblings and were estopped from claiming the interests created in the reservation were actually as tenants in common after their respective predecessor accepted the benefits of a JTROS. There was very little discussion on the validity of the JTROS being created by the reservation in the deed, but the Corpus Christi Court did briefly discuss Chandler as support to create a valid JTROS in the 1989 Mueller deed.

Underwriting guidelines for 2019. So where does this leave us today? Neither Wagenschein nor Chandler are Texas Supreme Court cases so all we can say at present is at least two out of the 14 Texas Appellate Courts are in agreement a valid JTROS can be created in a deed, and a deed is sufficient to satisfy the requirement of a “written agreement” set forth in Chapter 111 of the Estates Code. Note a small distinction between the two cases. In Chandler , in the when Charles deeded the property to himself and Denman to create the JTROS, there is no evidence that Denman signed that deed to evidence any agreement on his part to create a JTROS. Contrast this to the deed in Wagenschein reserving the ½ mineral interest that was the basis of the suit. In that instance all seven of the Original Siblings signed that deed purporting to create the JTROS as to the ½ mineral interest. So it appears these two Appellate Courts agree a valid JTROS can be created in a deed, but there does not appear to be agreement whether it is a requirement all joint tenants must be signatories to the document. Based on current case law, from an underwriting standpoint it appears the safest resolution is to still require a separate written agreement signed by all the joint tenants, and record that agreement in the county where the property is located. And if that written agreement is a deed, get the signature of all the joint tenants on that deed as evidence of their agreement to establishment of a JTROS.

“2019 Texas Land Title Institute” Survivorships, Joint Tenancies, Alternate Beneficiaries